Few of these folks have overweighted stock allocations. In the meantime, bonds have likely hit their highs and their yields are low; so, even a 40% increase in stock prices, for example, would result in only an 8% increase in portfoliio value for someone who’s had just 20% of his portfolio in stocks, assuming bond values didn’t change. When you add factors like inflation, and taxes on required minimum distributions for tax-deferred accounts, etc., one can see why investors are concerned.
The stock market has had a big run over the past five years; but, it’s been five years of drastically increased borrowing on top of a decade-old policy of pursuing a weak dollar policy. So, prices may be higher, is the value really preserved?
Many believe, as this article in The Economist indicates, that the current U.S. stock market, recently closing at its all-time highs, is better than all the other alternatives out there.
This may be true; many feel the recent run-ups we’ve been seeing are simply the result of cost-cutting. Maybe, however, there’s more at play. Maybe the rising prices we’re seeing on our month-end statements, just like those we see at the gas pump and the grocery store, are also the result of an inflated currency.
The U.S. has been pursuing a weak-dollar policy for more than a decade in an effort to spur foreign demand for American products, hoping to help American industry by increasing exports. This, in combination with increased borrowing to fund an ever-increasing debt, has lead to inflation numbers that could be far different from what we’re told. While most of us see prices going up at the gas pump and grocery store, the inflation rate many retirees see in their Social Security checks doesn’t seem to keep pace. This is because the inflation rate most of us experience is reflected by the CPI-U index, reflecting prices in urban areas, while the government computes inflation using the CPI-W index, which places an emphasis on wage inflation – something that doesn’t rise much during a recession and also doesn’t include food or energy numbers. It’s a convenient way to keep government outlays down, too.
However, markets know different. Markets know that record borrowing and historically-high debt levels will likely lead to printing money, in order to repay the debt, at some point.
U.S. to China: Don’t worry. We’ll repay you dollar-for-dollar.
China to U.S.: That’s what we’re afraid of.
A sea of debt inevitably leading to a sea of currency printing, coupled with a decade-old in-place weak dollar policy brings us back to the inflated currency discussion. If it takes more dollars to buy a gallon of gas or a box of cereal, it will take more to buy the same share of stock; but, will that share of stock be worth more in REAL dollars?
It probably depends on the index you’re using, especially after taxes. The government is no doubt hoping you’re using the index they like. It’s what gets them re-elected.
Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent underCalifornia license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.
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The Independent Financial Group is a Registered Investment Advisor providing fee-only financial planning and investment advisory services with a focus on retirement. IFG does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.